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UK insurer Prudential's attempt to seal the biggest-ever insurance takeover suffered a major setback on Tuesday after it failed to lower the cost of its $35.5bn (€29.2bn) agreement to buy American International Group's largest Asian life-insurance unit.

Analysts said the deal appears to be over after Prudential said it is considering its position following AIG's rejected of a proposal to slash the value of the deal to $30.375bn.

AIG said in a separate statement that, "after careful consideration, the company will adhere to the original terms of its previously announced agreement with Prudential for Prudential to acquire AIG's wholly owned pan-Asian life insurance subsidiary AIA Group Limited. The company will not consider revisions to those terms."

The statements mean that talks between Prudential and AIG over the weekend broke down and that Prudential might have to cancel a June 7 vote, where many shareholders are expected to turn down the deal due to the price being paid for AIA as well as a $21bn rights issue that is deemed too expensive by some shareholders.

This also reveals the stance of the US Treasury, AIG's 80% shareholder, which appears unwilling to settle for a lower price for AIA.

Recent reports said AIG was preparing to revive plans to float AIA in Hong Kong--which could raise up to $20bn--should the Prudential deal fall through.

A pullout of the deal would also put into question the recent listing of Prudential shares in Hong Kong and Singapore.

Prudential said Tuesday that its proposed new deal comprises $23bn cash and 2.16 billion newly issued shares of Prudential; $2bn in aggregate principal amount of perpetual tier one notes to be issued by Prudential.

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"We think it's all over," said Panmure Gordon analyst Barrie Cornes. "Pru says that it is now considering its position, but unless AIG have a change of mind, we believe that the deal will collapse as Pru will be unable to garner sufficient support to proceed with the acquisition."

"We expect the shares to bounce on the news and reiterate our buy recommendation," Cornes said.

At 1043 GMT, Prudential shares were up 4% at 563 pence, outperforming the FTSE 100 index which was down 2.1%.

Oriel Securities analyst Marcus Barnard said he is surprised over AIG's decision. "We had thought that given that markets are now lower and it was looking likely that the shareholders would vote the deal down, that AIG would at least consider a lower offer," he said.

"This move is embarrassing for Prudential as the deal cannot go ahead either on the original terms or on the improved terms.

"Management will have to either walk away from the deal or face the prospect of a no vote from shareholders," Barnard said, adding that "longer-term questions over strategy and leadership remain" for Prudential.

Patricia Cheng, an analyst at CLSA Asia-Pacific Markets, said that the problem for AIG is that the terms of the current deal would leave it as still one of the biggest shareholders in a combined entity that carries integration risk.

Cheng said an IPO, while raising much less, would at least not have that integration risk.

"Prudential will be better off on its own than going through the ordeal of combining operations with AIA," she said.

The planned tie-up has been dogged by worries from shareholders about the cost and the execution risk.

Shareholders have also complained that the initial discussions with Prudential's management following the March 1 announcement of the AIA deal were too short and unconvincing.

Some of Prudential's top shareholders, including Blackrock, Legal & General and Fidelity, are clamouring for a new price as low as $30bn, or about 15.5% less than the original price, the Wall Street Journal said Friday, citing a person familiar with the matter.

AIG and the US government, which owns a nearly 80% stake in the insurer, intend on using much of the proceeds to repay US taxpayers for part of the $132bn bailout AIG received during the financial crisis.

Prudential shareholders are due to vote on the AIG deal June 7. Some shareholders have also criticised the $21bn of cash they would need to put up to help pay for the acquisition of AIA Group.

Last week, Prudential reiterated that the AIG deal was in the best interest of shareholders amid continued reports of growing shareholder discontent.

"There is no change to our position. As we have said, we believe this opportunity will deliver substantial long-term value for our shareholders," a spokesman said.

Neptune Investment Management, which owns 0.24% of Prudential stock, said the rights issue appears unlikely to go on. "Clearly, the attempt to reduce the price has not worked and it would appear inconceivable that they can push on with this rights issue to buy assets at a price that they themselves now admit is far too high," said Neptune's managing director, Robin Geffen.

Geffen last month started an effort to gather support for a vote of no-confidence in Prudential chief executive Tidjane Thiam. He also launched a website, www.prudentialactiongroup.com, to garner support against the rights issue.

Last week, Geffen said he had heard from institutions holding 15.1% of Prudential that they plan to vote against the deal.

Paul Mumford, senior fund manager at Cavendish Asset Management, said Friday that even if Prudential's management were able to renegotiate the price, "the confidence of shareholders as to the merits of this untenable deal has been lost."

"Even with a smaller price-tag, this is just too expensive and too risky a deal to ask investors to back in this market. The Pru has woefully misread the appetite of shareholders to back both a deal of this size and of this complexity," Mumford said.